Author Topic: Bond Mutual Fund or ETF  (Read 3714 times)

dalekeener

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Bond Mutual Fund or ETF
« on: December 13, 2015, 08:10:41 PM »
I have heard many different opinions on using bond etf's or bond mutual funds.  Some have said that etf's are more risky when comparing the same bond etf vs. its mutual fund counterpart.  Does anyone have any recommendations on which is the better use for my bond portion.  Or does it not really make a difference.  Just curious.

Thanks,

Dale     

aj_yooper

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Re: Bond Mutual Fund or ETF
« Reply #1 on: December 13, 2015, 08:19:11 PM »
This is a general answer.  ETFs, like stocks,  have a settlement period which means a wait time before you can move the cash to another ETF while funds in a fund family can be shifted on the same day at the close of business.  In general, I prefer the fund family choices, especially index funds.  I have some ETFs when their is not an index fund available to purchase (some funds require higher dollar buys).

So, my preference would be a bond fund in an index family group, as in Vanguard.

Mighty-Dollar

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Re: Bond Mutual Fund or ETF
« Reply #2 on: December 18, 2015, 02:55:21 AM »
Actively managed are more expensive and the fees outweigh whatever little outperformance you get. Stick with a total bond market index fund.

San Dawg Stubble

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Re: Bond Mutual Fund or ETF
« Reply #3 on: December 19, 2015, 08:58:47 AM »
Neither. Just buy bonds directly. Bond funds and ETFs do not guarantee principal return, like bonds do. Bond prices fluctuate daily, based on demand an interest rates...but if you hold a bond to maturity, then you get the YTM (when you bought the bond), and the principal back. When you buy bond funds and ETFs, other shareholders can join and redeem their shares, causing the fund to fluctuate its yield, and passing through any capital gains to all the shareholders.

I personally would want control over my bonds, and have a guaranteed principal returned at maturity...there is no maturity for funds or ETFs. You could set up a bond ladder to have a portion of your fixed income mature every "X" years (1, 2, 5), so you can take advantage of rising interest rates.

weather55

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Re: Bond Mutual Fund or ETF
« Reply #4 on: December 19, 2015, 10:31:37 AM »
San Dawg

How do you go about selecting individual bonds?  Do you do this through your brokerage account, Fidelity, etc? Thanks

San Dawg Stubble

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Re: Bond Mutual Fund or ETF
« Reply #5 on: December 19, 2015, 01:51:42 PM »
Weather,
Yes, you can buy bonds at any brokerage. A quick look at Fidelity shows they have over 40,000 bonds and CDs they trade...and they are only $1 per bond if already trading, and free for new issues.  However, most bonds have a $1,000 par value, so if you don't have at least $5,000 a $10,000, then you won't have much diversification.

The yahoo finance bond screener is a great place to filter out bonds.  You can filter by credit rating, YTM (which takes the yield of the bond and the current price into account), maturity date, recallable, etc.

cjottawa

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Re: Bond Mutual Fund or ETF
« Reply #6 on: December 19, 2015, 05:05:15 PM »
San Dawg

How do you go about selecting individual bonds?  Do you do this through your brokerage account, Fidelity, etc? Thanks

NO, don't buy individual bonds.

Source:

http://www.theglobeandmail.com/globe-investor/investor-education/why-only-millionaires-should-invest-in-bonds-directly/article625673/

The analog in stocks:
http://www.efficientfrontier.com/ef/900/15st.htm
(that's posted on the site of the highly respected author William Bernstein)

To the original question:

A bond ETF and bond mutual fund (MF) may track exactly the same index (in Canada, for example, the "DEX Universe" bond fund) and may have similar MERs.

If you pay trading fees to buy ETFs, you may find MF fees save you money, even if they have slightly higher MER, as there are no trading fees for MFs.

Further, the "lag" between clicking "buy" on an MF, isn't as bad as it seems: you're paying whatever the MF net asset value (NAV) was calculated your trade day (T), even though it doesn't "settle" until "T+3."

I'm open to having any oversights corrected but the above is my understanding and I use MFs instead of ETFs so that I can make smaller, more frequent purchases, and buy fractional shares; you can't do that with ETFs, which can lead to some money sitting on the sidelines.
« Last Edit: December 21, 2015, 01:55:06 PM by cjottawa »

MustacheAndaHalf

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Re: Bond Mutual Fund or ETF
« Reply #7 on: December 21, 2015, 12:16:46 PM »
ETFs, like stocks,  have a settlement period which means a wait time before you can move the cash to another ETF while funds in a fund family can be shifted on the same day at the close of business.
Not quite true.  Vanguard Brokerage lets people sell one ETF, and use the pending proceeds to purchase another ETF.  So you can actually rebalance two ETFS in real time.  When you try to do the same with a mutual fund, you have to estimate the value of the two funds at the close of business, and rebalance based on that estimate.

Speaking of rebalancing, it's harder if you have only individual bonds.  The individual bonds are purchased once a year, and only in large increments (1 bond).  Having a bond mutual fund allows you to put stock dividends into the bond fund (if stocks pull ahead) or sell part of the bond fund to buy stocks (if stocks drop below your threshold to rebalance).  Bond funds can provide flexibility that's missing from a bond.

Tyler

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Re: Bond Mutual Fund or ETF
« Reply #8 on: December 21, 2015, 12:23:14 PM »
ETFs, like stocks,  have a settlement period which means a wait time before you can move the cash to another ETF while funds in a fund family can be shifted on the same day at the close of business.
Not quite true.  Vanguard Brokerage lets people sell one ETF, and use the pending proceeds to purchase another ETF.  So you can actually rebalance two ETFS in real time.

Same with Fidelity.  They'll close that option down if you treat it like a margin account and day trade (buying AND selling a stock shortly afterward with funds from one still settling), but it's not an issue for normal buy & hold investors.

aj_yooper

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Re: Bond Mutual Fund or ETF
« Reply #9 on: December 21, 2015, 02:46:21 PM »
ETFs, like stocks,  have a settlement period which means a wait time before you can move the cash to another ETF while funds in a fund family can be shifted on the same day at the close of business.
Not quite true.  Vanguard Brokerage lets people sell one ETF, and use the pending proceeds to purchase another ETF.  So you can actually rebalance two ETFS in real time.  When you try to do the same with a mutual fund, you have to estimate the value of the two funds at the close of business, and rebalance based on that estimate.

Vanguard has stopped my attempts to trade the ETFs in the way you describe, but I was doing the trade in a rollover IRA, not a taxable account.  See also the section on complexity of trading ETFs at:  https://www.fidelity.com/learning-center/investment-products/etf/drawbacks-of-etfs  See also Rick Ferri's comments on ETFs:  http://www.rickferri.com/blog/investments/how-well-do-you-know-etfs/
« Last Edit: December 21, 2015, 03:08:10 PM by aj_yooper »

MustacheAndaHalf

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Re: Bond Mutual Fund or ETF
« Reply #10 on: December 22, 2015, 01:52:30 AM »
ETFs, like stocks,  have a settlement period which means a wait time before you can move the cash to another ETF while funds in a fund family can be shifted on the same day at the close of business.
Not quite true.  Vanguard Brokerage lets people sell one ETF, and use the pending proceeds to purchase another ETF.  So you can actually rebalance two ETFS in real time.  When you try to do the same with a mutual fund, you have to estimate the value of the two funds at the close of business, and rebalance based on that estimate.
Vanguard has stopped my attempts to trade the ETFs in the way you describe, but I was doing the trade in a rollover IRA, not a taxable account.  See also the section on complexity of trading ETFs at:  https://www.fidelity.com/learning-center/investment-products/etf/drawbacks-of-etfs  See also Rick Ferri's comments on ETFs:  http://www.rickferri.com/blog/investments/how-well-do-you-know-etfs/
I might be missing a piece of information here.  Vanguard will lock you out based on SEC rules if you sell an ETF, and then buy it again during the 3-day settlement period.  But waiting for a 3-day settlement period is far easier than waiting for Vanguard's 60 day waiting period when you try to buy and sell.

I'm familiar with Rich Ferri's position, but he refers to ETFs in general.  I disagree that bid-ask spread is a problem for Vanguard broad index ETFs.  For example, whenever I've looked at Vanguard Total Stock Market ETF (VTI) I've seen a $0.01 bid-ask spread.  I lack experience with Vanguard Total Bond ETF (BND), but would assume it's similar - it tracks all bonds, has billions in assets and trades frequently.  Many of the arguments about ETFs in general do not apply as well to Vanguard's broad market ETFs.

The other big ETF complaint is that the market opens with volatility, so any overnight orders to buy/sell ETFs could experience volatile prices.  You could avoid that by only trading when the market is open, or you could decide you want delayed orders and rely on Vanguard mutual funds.